A public procurement combinatorial auction mechanism with quality assignment

  • Authors:

  • Jian Chen;He Huang;Robert J. Kauffman

  • Affiliations:

  • Research Center for Contemporary Management, Tsinghua University, Beijing 100084, China;School of Economics Business Administration, Chongqing University, Chongqing 400044, China and Graduate School of Business, Columbia University, New York, NY 10027, USA;School of Information Systems, and Lee Kong Chian School of Business, Singapore Management University, 178902, Singapore and Glassmeyer-McNamee Center for Digital Strategies, Tuck School of Busine ...

  • Venue:
  • Decision Support Systems
  • Year:
  • 2011

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Abstract

This article focuses on mechanism design for quality assignment combinatorial procurement auctions. We model how the participants can maximize social surplus, the difference between gross utility and total cost in electronic procurement, while selecting appropriate quality standards for the procured items. In typical forward combinatorial auctions, the goal is to maximize the sum of all buyers' valuations. In our setting, however, to achieve high buyer utility with low supplier cost, the selected quality levels for the procured items from the suppliers must exceed some predetermined minimum threshold. So the identification of capable suppliers and the corresponding quality assignments are crucial, since buyer utility and supplier cost will be affected by the buyer's quality choice. We develop a novel mechanism to balance the interests of buyers and sellers. Our proposed quality assignment Vickrey-Groves-Clarke (QA-VCG) mechanism is incentive-compatible, provides constraints on partial participation, and is efficient in quasi-linear preferences. In consideration of the perspective of the buyer as a government auctioneer, we also propose a revised mechanism to implement the goal of achieving minimal procurement costs, and appropriate benefits for participating suppliers. We provide a numerical illustration of our QA-VCG mechanism, and an extension that addresses an iterative combinatorial auction mechanism design in our context.